News of Note
CRA finds that the property of an alter ego trust “belonged” to its sole trustee and life beneficiary rather than to the trust
Email this ContentIn order for a fee paid to a corporation for the executive producer servicers of an individual employed by the corporation to qualify for the B.C. production services tax credit, there was a requirement (essentially copied from ITA s. 125.4(1) – labour expenditure – (b)(iii) and s. 125.5(1) – Canadian labour expenditure - (b)(iii)) that the shares of the corporation “belong” to a BC-based individual – whereas, here, the shares were held by the individual in his capacity of trustee of an alter ego trust which had been settled by him (to avoid B.C. probate duties) and of which he was the life beneficiary.
In finding that this shareholding satisfied the above “belong to” test, rather than the shares belonging to the trust as suggested by the TSO, Headquarters stated:
[T]he shares … belong to [the individual] and not the Trust for purposes of the tax credit. As a matter of law, a trust does not have an independent legal existence and is a legal relationship. Property to which a trust relationship applies is held by the trustee(s) of a trust in order to fulfil their obligations as trustees. {Here] … [the individual] has legal ownership of the shares in [the individual’s] role as trustee, and beneficial ownership of the shares as the sole beneficiary who is entitled to the income on the shares while [the individual] is alive … .
Neal Armstrong. Summary of 9 July 2024 Internal T.I. 2023-0976691I7 under s. 125.4(1) – labour expenditure – (b)(iii).
CRA confirms that active business income includes income from property that (having regard to Ensite) is held principally for the purpose of producing active business income
The definition “income of the corporation for the year from an active business” in s. 125(7) includes, in para. (a) thereof, the corporation’s income for the year from an active business carried on by it, including any income for the year pertaining to or incident to that business, other than income for the year from a source in Canada that is a property (within the meaning assigned by s. 129(4)). Subpara. (b)(ii) of the definition “income” or “loss” of a corporation for a taxation year from a source that is a property in s. 129(4) does not include the income or loss from any property that is used or held principally for the purpose of gaining or producing income from an active business carried on by it.
In response to a question to this effect, CRA confirmed that, as a result, where a property of a CCPC that is used or held principally for the purpose of gaining or producing income from its active business, any income from that property would qualify as “income of the corporation for the year from an active business”, as defined in s. 125(7). Before so concluding, CRA referred to the Ensite test of whether property was used or held by a corporation in the course of carrying on a business, under which the “property had to be employed and risked in the business to fulfil a requirement which had to be met in order to do business” and that “[i]f the withdrawal of the property would have a decidedly destabilizing effect on the corporate operations, the property would generally be considered to be used in the course of carrying on a business.”
Neal Armstrong. Summary of 3 December 2024 CTF Roundtable, Q.14 under s. 129(4) – “income” or “loss”.
Income Tax Severed Letters 31 December 2024
This morning's release of two severed letters from the Income Tax Rulings Directorate is now available for your viewing.
CRA indicates that a limited partner can almost never claim an ITC in respect of expenses incurred by it in relation to the partnership business
ETA s. 272.1(1) sets out a general rule under which things done by a person as a member of a partnership are deemed to be done by the partnership in the course of the partnership’s activities and not by the person. However, s. 272.1(2)(b) provides that where a partner that is not an individual acquires property or a service for consumption, use or supply in the course of activities of the partnership, but not on the account of the partnership, for purposes of determining an ITC of the member, s. 272.1(1) does not apply to deem the partner not to have acquired the property or service and the partner is deemed to be engaged in those activities of the partnership – so that it may be able to claim an ITC.
CRA provided the following (restrictive) interpretation of the scope of s. 272.1(2)(b) before finding that expenses incurred by a limited partner of a type that were not contemplated under LPA as being ones that were to be incurred by any partner were not eligible for ITCs:
- In order to satisfy the requirement in s. 272.1(2), the property or service must be intended to be consumed, used or supplied in the course of the activities of the partnership – and, given that the s. 272.1(2) rule is an exception to the general rule in s. 272.1(1), this will generally be the case where the acquisition, importation or bringing in of such property or service by the partner “is a usual act undertaken in the ordinary course of the partnership business such that subsection 272.1(1) would otherwise apply to that partner’s action.”
- Since the application of s. 272.1(1) would generally be limited to the actions of a general partner, the exception to this rule in s. 272.1(2) would not apply to the actions of a limited partner of a partnership other than in an extraordinary circumstance such as where there is an express agency in writing referenced in the LPA to evidence that the expense of the limited partner was in fact an expense of the partnership.
- A particular partner cannot decide itself to pay for something: all of the partners would have to agree collectively if particular partnership expenses are to be borne by individual partners, so that CRA would expect a clause in the LPA stating that it is agreed that a partner is expected to incur and pay certain types of expenses - without which it would be difficult to determine whether the expense was an ordinary and necessary business expense of the partnership for consumption, use or supply in the course of the activities of the partnership.
Neal Armstrong. Summary of 13 August 2024 GST/HST Interpretation 246538 under s. 272.1(2)(b).
Melcor Developments proposed a purchase of the partnership interest of Melcor REIT in their joint LP followed by a redemption of the REIT units
Melcor Developments, a TSX-listed company, has a 55.4% effective interest in Melcor REIT as a result of holding exchangeable Class B units in the subsidiary limited partnership of the REIT (the LP) and special voting units (SVUs) of the REIT, and is the REIT’s external manager.
Under a proposed Alberta plan of arrangement, there was to be special distribution to the REIT unitholders, payable through the issuance of units, to reflect gains that were expected to have been realized in the year from asset sales, followed by a sale by the REIT of its LP units to Developments and the distribution of those cash proceeds as redemption proceeds for the REIT units. Developments would then convert its SVUs to ordinary units, so that the REIT shell would be wholly-owned by Developments.
This manner of proceeding would permit the allocation to the REIT pursuant to s. 96(1.01) of all the partnership income realized up to the time of the sale of the REIT’s partnership interest, and that income allocation would in turn fall into the taxation year of the REIT ending as a result of the redemption of its units (causing Developments to become a majority-interest beneficiary), given that the REIT would make an election for s. 251.2(6) not to apply.
In a November 25, 2024 News Release, the REIT announced:
- The REIT and Developments had entered into an amended Arrangement Agreement which provides for increasing the per-Unit consideration from $4.95 to $5.50; and
- The special unitholder meeting scheduled for November 26, 2024 was cancelled and the REIT was engaging in a new 90-day extended “go-shop” period.
Neal Armstrong. Summary of management Information Circular of Melcor Real Estate Investment Trust (the “REIT”) regarding an arrangement involving inter alia it and Melcor Developments Ltd. (the “Purchaser” or Developments”) filed on 29 October 2024 under Mergers & Acquisitions – REIT Acquisitions – Privatizations.
In a new webpage, CRA provides examples of where it will apply GAAR
In a new webpage on GAAR, CRA has provided examples (briefly summarized below) of where, in its view, GAAR would apply:
PUC averaging
Subco transfers a property to its parent (Holdco) in consideration for Class B shares of Holdco with the result that, through PUC averaging, there is a substantial increase in the PUC of the Class B shares of Holdco held by an individual.
Use of s. 40(3.6) and soft ACB to increase PUC
Canco redeems the preferred shares of an individual (which had an ACB of $850,000 due to a previous capital gains crystallization transaction), triggering a deemed dividend of $849,999 and an equivalent capital loss which, pursuant to s. 40(3.6), increases the ACB of the individual’s common shares of Holdco to their FMV of $850,000.
The individual’s common shares are transferred to Holdco in consideration for preferred shares with an ACB, PUC and redemption value of $850,000, and for nominal value common shares. Holdco redeems the preferred shares without any tax consequences.
Copthorne-style transaction
Foreign Parent holds all the common shares of Canco with an FMV of $200 million and an ACB and PUC of $100 million, and Canco wholly owns Subco whose common shares have an FMV and ACB of $2 million and $40 million. Canco sells Subco to a foreign subsidiary of Parent for $2 million, and Canco and Subco then amalgamate, so that the PUC of the Amalco shares is $140 million.
Value-shift transaction (Triad Gestco)
Canco pays a dividend on its common shares held by an individual through the issuance of high-low preferred shares, and the individual’s common shares are sold to a non-affiliated person for a nominal amount, resulting in a capital loss.
S. 104(5.8) avoidance through s. 107(2) distribution to Canco held by new trust
Canco, which is wholly owned by a newly established discretionary resident trust (New Trust), will be a beneficiary of Old Trust, which is approaching its 21st anniversary. Old Trust distributes its property with an unrealized gain to Canco under s. 107(2).
S. 104(5.8) avoidance through s. 107(2) distribution to Canco held by NR beneficiaries
Canco, which is wholly owned by the non-resident beneficiaries of Old Trust, will be a beneficiary of Old Trust. Old Trust will distributes its property to Canco on a tax-deferred basis.
Neal Armstrong. Summary of CRA Webpage, General anti-avoidance rule (GAAR), 20 December 2024 under s. 245(4).
We have translated 6 more CRA interpretations
We have translated a further 6 CRA interpretations released in March of 2001. Their descriptors and links appear below.
These are additions to our set of 3,047 full-text translations of French-language Technical Interpretation and Roundtable items (plus some ruling letters) of the Income Tax Rulings Directorate, which covers all of the last 23 ¾ years of releases of such items by the Directorate. These translations are subject to our paywall (applicable after the 5th of each month).
| Bundle Date | Translated severed letter | Summaries under | Summary descriptor |
|---|---|---|---|
| 2001-03-30 | 9 January 2001 Internal T.I. 2000-0058047 F - FRAIS JURIDIQUES | Income Tax Act - Section 40 - Subsection 40(2) - Paragraph 40(2)(g) - Subparagraph 40(2)(g)(ii) | debt of corporation to a director arising from his discharge of joint and several liability for unpaid taxes was not a debt acquired for income-producing purpose |
| Income Tax Act - Section 18 - Subsection 18(1) - Paragraph 18(1)(a) - Legal and other Professional Fees | director’s legal fees incurred re his liability for unpaid corporate GST were non-deductible | ||
| 2 March 2001 External T.I. 2001-0069555 F - Dividendes - (U.S. spin-off) | Income Tax Regulations - Regulation 201 - Subsection 201(2) | T5 reporting obligation of broker also applies to s. 86.1 spin-off | |
| Income Tax Act - Section 86.1 - Subsection 86.1(2) | detailed review of proposed s. 86.1 | ||
| 19 March 2001 External T.I. 2001-0063345 F - RS & DE - MANDATAIRE | Income Tax Act - Section 37 - Subsection 37(1) - Paragraph 37(1)(a) - Subparagraph 37(1)(a)(ii) - Clause 37(1)(a)(ii)(E) | organization did not qualify under s. 37(1)(a)(ii)(E) because it made disbursements only as agent | |
| 23 February 2001 External T.I. 2001-0066265 F - Salaire différé français | Income Tax Act - Section 3 - Paragraph 3(a) | receipt of “deferred salary,” pursuant to a right established by French legislation, as compensation for contribution to the family farm was not income | |
| Income Tax Act - Section 248 - Subsection 248(1) - Disposition - Paragraph (b) - Subparagraph (b)(ii) | receipt of “deferred salary,” pursuant to a right established by French legislation, was not a pension given no previous employer-employee relationship | ||
| Income Tax Act - Section 248 - Subsection 248(1) - Property | “deferred salary” right of farmer descendant was a debt | ||
| Treaties - Income Tax Conventions - Article 18 | receipt of “deferred salary,” pursuant to a right established by French legislation, was not a pension given no previous employer-employee relationship | ||
| 11 January 2001 Internal T.I. 2000-0037167 F - CLAUSE D'AJUSTEMENT DE PRIX | Income Tax Act - Section 54 - Adjusted Cost Base | post-closing indemnity payments received by purchaser reduced the ACB of its purchased shares | |
| Income Tax Act - Section 40 - Subsection 40(1) - Paragraph 40(1)(a) - Subparagraph 40(1)(a)(i) | damages received by share purchaser reduced the ACB of its shares and were not a taxable capital gain | ||
| 8 March 2001 External T.I. 2000-0048405 F - Usufruit sur immeuble en France | Income Tax Act - Section 248 - Subsection 248(3) | s. 248(3) and 75(2) subject bare owner to tax on rental income under Quebec usufruct/ the converse if a French usufruct |
Income Tax Severed Letters 24 December 2024
This morning's release of three severed letters from the Income Tax Rulings Directorate is now available for your viewing.
GST/HST Severed Letters July-August 2024
CRA rules that the aunt’s renunciation of her trust income interest, resulting in the corpus distribution to her nieces/nephews as approved by her, does not trigger proceeds to her
Daughter1 and Daughter2 (sisters) had been the equal income beneficiaries of a testamentary trust (the Fund). However, on the death of Daughter2, ½ of the Fund property had been distributed in accordance with the Fund terms to her issue.
Daughter1, who has no children, will now execute a written renunciation of her income interest in the Fund. However, Daughter1 will also approve a scheme of distribution (prepared by a trust company serving as trustee) for the distribution of the Fund property (mostly, marketable securities and MFT units, to be distributed in specie), to the three children of Daughter2 in equal shares.
This will occur as an interim distribution, and then a final distribution after a clearance certificate is received.
Rulings included that the renunciation by Daughter1 of her income interest in the Fund will not result in her being considered to have received any proceeds of disposition for purposes of ss. 40(1), 106(2) and 107(1), and that the transactions (other than the property distributions by the Fund, governed by s. 107(2)) will not result in a disposition of any property of the Fund..
Neal Armstrong. Summary of 2022 Ruling 2021-0919101R3 under s. 106(2).
Neal H. Armstrong editor and contributor